Climb the Bond Ladders for a Steady Cash Flow By Michael Osland

Bond ladders are an investment strategy for retirees. They ensure a predictable revenue stream for you over time. You purchase bonds that mature at different intervals yielding returns and also continue to add new bonds in place of them. Those who support laddering believe that this system works regardless of any market conditions. Michael Osland can still have funds when interest rates shoot up and expect yields even though they have reduced. The income you create from bonds can be low tomorrow, but ladders provide you security against price fluctuations and reinvestment risks.

Why invest in bond ladders?

Experts like Michael Osland inform people that laddering allows them to look for fixed income with long maturity periods and, often, higher returns. However, unlike other long-term fixed securities that lock your money, the bond ladder offers liquidity due to bonds’ equally spaced maturities in the process.

When you use laddering, you also control your interest rate risks. Long-term securities tend to have varying interest rates. With this investment tool, your bonds attain maturity one by one; thus, you get an opportunity to surrender and also reinvest in them at a new rate if you suspect any increase in interest rates.

Another factor that makes it an attractive proposition is its diversity, adds Michael Osland. While it ensures outstanding maturities, the bond ladder also enables you to create a mixed bag of fixed incomes of different rates. You can select both low- and also high-yield bonds.

How does the bond ladder work?

You can add treasury notes, certificates of deposits, corporate bonds, and others to a single ladder bond. When you build this portfolio, you have to know the amount you can invest and also for how long. At the same time, you need to space out the maturities. If you aim for higher liquidity, the maturities should not be too far from each other. Michael Osland says this approach can give you constant cash as the bonds expire in tow. However, you have to remember that this can disrupt your chances of getting higher returns from long-term securities.

What are the downsides of the bond ladder?

While it can be an excellent investment opportunity, the laddering system is also not foolproof. It has some demerits. For instance, you may have to settle for lesser interest rates based on how they behave when your bond’s expiry is closer. You will have an adequate liquid amount, but still, some parts of it will get washed away. If you need urgent funds, you may have to let go of some of the securities. It can further prove damaging if the interest rates are higher at the time.

In times of economic uncertainties, you can also opt for bond ladders to invest your money safely. However, it is essential to keep in mind that the yields may not match your expectations. 

Nevertheless, suppose you want to have a diversified portfolio with lower interest rate risks. In that case, you can study this option and also make money for your retirement or other personal goals without too many risks.